By law, Medicare will have to take a medication’s efficacy and its research and development costs into account when it starts to negotiate drug prices — but recent research shows pharma companies ignore those factors when they pick prices for their products.
Two recent studies aimed to quantify how much R&D costs impact a drug’s price, and how much a drug’s effectiveness correlates with its price — factors that might, in theory, help justify a sizable price tag. But neither factor has much effect, the studies concluded. Instead, as conventional wisdom suggests, a drug’s price is almost always simply what the market will bear.
The findings come as the Medicare program is gearing up to negotiate some drug prices beginning in 2026, after Congress empowered the program to do so in hopes of addressing Americans’ ongoing struggles with the sky-high price tags carried by certain medicines. Medicare will also have to take into account the cost of production, whether the drug is a brand name, is available from another source, its hit on Medicare’s budget, and whether alternative treatments are available.
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